Vision Payroll

This is one in a continuing series on the 2010 Form W-2, Wage and Tax Statement, which employers must generally furnish to employees no later than January 31, 2011. Forms mailed on the due date are considered furnished if properly addressed. Employers unable to meet that deadline may file a request for extension of time to furnish the forms. Today we review Box 3, social security wages.

Social Security Earnings Help Determine the Amount of Social Security Benefits

Box 3 shows the amount wages paid subject to social security tax. It does not include social security tips reported in box 7 or allocated tips reported in box 8. Wages should be reduced by amounts withheld for non-taxable benefits elected under §125 plans, certain clergy housing allowances, and third-party sick pay after the end of six calendar months after the calendar month that the employee last worked for the employer. For 2010, the combined total of boxes 3 and 7 cannot exceed $106,800. Since social security benefits are based on the amount of social security wages reported to the Social Security Administration (SSA), it is important that employees periodically review their social security earnings record and provide the SSA with the Form W-2 to update any incorrectly posted earnings records.

Box 4, Social Security Tax Withheld Is the Next Topic

The next topic in this continuing series will be Box 4, social security tax withheld. Contact Vision Payroll with any questions on the 2010 Form W-2.

This is one in a continuing series on the 2010 Form W-2, Wage and Tax Statement, which employers must generally furnish to employees no later than January 31, 2011. Forms mailed on the due date are considered furnished if properly addressed. Employers unable to meet that deadline may file a request for extension of time to furnish the forms. Today we review Box 2, federal income tax withheld.

Box 2 Amount Is Entered on Form 1040

Box 2 shows the amount employees must enter on line 62 of Form 1040, US Individual Income Tax Return. Employers determine the amount of withheld federal income tax each pay period by the amount of taxable wages, the pay frequency, and the number of withholding allowances claimed on Form W-4, Employee’s Withholding Allowance Certificate. Spanish-speaking employees may complete Formulario W-4(SP), Certificado de Exención de la Retención del Empleado. Employers may use either the percentage method or the wage bracket method to calculate the amount of tax to withhold. Both methods are explained in Publication 15, (Circular E) Employer’s Tax Guide. Employers should not accept “reverse withholding” where employees write checks to the employer to pay withholding tax. Employees should make such payments using Form 1040-ES. Also, any amounts that employers pay toward an employee’s withholding to “gross-up” non-cash payments such as taxable fringe benefits must also be included as wages in boxes 1, 3, 5, and 7 as required.

Box 3, Social Security Wages Is the Next Topic

The next topic in this continuing series will be Box 3, social security wages. Contact Vision Payroll with any questions on 2010 Form W-2.

This is one in a continuing series on the 2010 Form W-2, Wage and Tax Statement, which employers must generally furnish to employees no later than January 31, 2011. Forms mailed on the due date are considered furnished if properly addressed. Employers unable to meet that deadline may file a request for extension of time to furnish the forms. Today we review Box 1, wages, tips, other compensation.

Box 1 May Include Several Adjustments To Gross Wages

Box 1 shows the amount employees must enter on line 7 of Form 1040, US Individual Income Tax Return. It may be, but is not necessarily, equal to gross wages. Common adjustments that increase or decrease gross wages include the following:

• Employee elective deferral to qualified retirement plans such as §401(k) plans, SIMPLE plans, and §403(b) plans (decrease).
• Amounts withheld for non-taxable benefits elected under §125 plans (decrease).
• Taxable non-cash fringe benefits, such as personal use of company automobile (increase).
• Certain clergy housing allowances (decrease).
• Reported tips (increase).
• Expense reimbursements paid under a non-accountable plan (increase).
• Accident and health insurance premiums for so-called 2% S corporation shareholders (increase).
• Cost of group-term life insurance in excess of $50,000 (increase).

Box 2, Federal Income Tax Withheld Is the Next Topic

The next topic in this continuing series will be Box 2, federal income tax withheld. Contact Vision Payroll with any questions on the 2010 Form W-2.

This is one in a continuing series on the 2010 Form W-2, Wage and Tax Statement, which employers must generally furnish to employees no later than January 31, 2011. Forms mailed on the due date are considered furnished if properly addressed. Employers unable to meet that deadline may file a request for extension of time to furnish the forms. Today we review general information regarding Form W-2.

Form W-2 Should Be Typed or Machine-Printed

Forms W-2 should be typed or machine-printed in black ink, using 12-point Courier font. Dollar signs and commas must be omitted, but decimal points and cents, even if zero, must be included. Forms W-2 must be prepared on a calendar year basis using pay dates, not work dates. Wages for work performed in 2009 and paid in 2010 are included and wages for work performed in 2010 and paid in 2011 are excluded.

Boxes a-f Contain Employee and Employer Identifying Information

Report the employee’s social security number (SSN) in box a. Employees who have applied for, but not received, an SSN should be reported with all zeroes and corrected on a Form W-2c. Enter in box b the employer’s employer identification number, not the owner’s SSN. Box c must contain the employer’s address as shown on Forms 941, 943, 944, CT-1 or Schedule H of Form 1040. Box d is an optional box for employer use to identify individual forms. Box e should report the employee’s name exactly as shown on the social security card. Suffixes such as Sr. or Jr. should only be included if on the social security card. Do not include professional and academic titles and degrees such as CPA or Ph.D. as part of the employee’s names. Names should not be changed on Form W-2 unless the employee has received a revised card from the Social Security Administration. The Address in box f should be the address where the employee receives mail. It is recommended that comma and periods not be used in delivery addresses. Foreign country names are not to be abbreviated.

Box 1, Wages, Tips, Other Compensation Is the Next Topic

The next topic in this continuing series will be Box 1, wages, tips, other compensation. Contact Vision Payroll with any questions on 2010 Form W-2.

The Internal Revenue Service (IRS) recently released a draft Form W-2, Wage and Tax Statement for 2011.

Box 9 Is not Applicable for 2011 Form

Box 9, which formerly showed the amount of any Advance Earned Income Credit (EIC) payment, is not applicable for 2011 since it was repealed. The credit will now be claimed on the taxpayer’s individual income tax return, when filed.

Code DD Added to Box 12

The reporting in Box 12, using Code DD, of the cost of employer-sponsored health coverage is for information only. This reporting will be optional for 2011 and required starting for 2012 tax year reporting.

Contact Vision Payroll if you have further questions on the 2011 draft Form W-2.

In Notice 2010-69, the Internal Revenue Service (IRS) announced that the reporting of the cost of coverage under an employer-sponsored group health plan on Form W-2, Wage and Tax Statement, would not be mandatory for 2011 Forms W-2.

Additional Time Is Needed to Make Changes to Payroll Systems

According to Notice 2010-69, “[t]he Treasury Department and the IRS have determined that this relief is appropriate to provide employers with additional time to make any necessary changes to their payroll systems or procedures in preparation for compliance with the reporting requirement.”

Aggregate Cost Determined Using COBRA Rules

When reporting begins, “the aggregate cost is to be determined under rules similar to the rules of §4980B(f)(4), referring to the definition of the “applicable premium” under the rules providing for COBRA continuation coverage.”

Vision Payroll Will Assist Employers in Transition to New Rules

Contact Vision Payroll today for assistance in planning your transition to the new reporting rules for Form W-2.

This week’s question comes from Katy, an HR administrator. We know we need to capture the cost of health coverage and report it on Form W-2, starting in 2011. How do we determine the cost of health insurance to report on Form W-2? Answer: Employers are required to use rules “similar to the rules of §4980I(d)(1)”, which are the rules used to calculate the cost to qualified beneficiaries who elect COBRA coverage.

Further Guidance for Reporting the Cost Health Insurance on Form W-2 Is Expected

As further guidance from the Internal Revenue Service (IRS) becomes available in this area, Vision Payroll will provided updated guidelines for calculating the amount to be included on Form W-2.

Many employers are aware of the new requirement under the Patient Protection and Affordable Care Act (PPACA), soon to be implemented, that an employer’s health insurance costs be included on an employee’s Form W-2.

Reporting Health Care Costs on Form W-2 Does NOT Make Them Taxable

Many have misunderstood this requirement to mean that an employer’s health insurance costs are taxable to the employee. To help clarify this, the Internal Revenue Service (IRS) recently released the following explanation:

Starting in tax year 2011, the [PPACA] requires employers to report the value of the health insurance coverage they provide employees on each employee’s annual Form W-2. This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee’s income and it is not taxable.

Health Care Costs That Were Already Taxable Are Still Taxable

In some circumstances, the employer’s cost of health insurance is included in an employee’s income, e.g., certain S corporation shareholders. This change does not affect the taxability of employer’s costs that were already taxable.

Vision Payroll Is Ready to Implement This Change

Contact Vision Payroll if you have any further questions on Form W-2.

The Commonwealth of Virginia announced new electronic filing requirements, beginning January 1, 2011. The changes reduce the number of employee statements that may be filed on paper and the method by which taxpayers may file.

Legislation effective January 1, 2011 requires employers who furnish 150 or more employee withholding statements for calendar year 2010 to file their W-2 statements electronically. Employers with less than 150 employee W-2s may continue to file these on paper; however, we encourage you to file electronically also. In addition, the Department of Taxation (TAX) will no longer support the Magnetic Media method of filing W-2s for tape as of October 1, 2010, and for CD and diskette as of January 1, 2011.

Employers required to file W-2s electronically and those with less than 150 employees that choose to file their W-2s electronically must use Web Upload to submit W-2 information to TAX.

Contact Vision Payroll if you have any questions on the new requirements.

This week’s question comes from Nikki, an LLC member. I am a member in an LLC. My neighbor is a member and receives a paycheck, but I’ve been told that I can’t receive a paycheck. Can an LLC member receive a paycheck from the LLC? Answer: For federal tax purposes, an LLC can make an election to be taxed in one of the following three ways:

• Sole proprietorship (if only one member in LLC)
• Partnership (if two members or more in LLC)
• Corporation (any number of members in LLC)

This election is generally made when the entity is formed and must be done by the time the entity files its first income tax return.

If your LLC has elected to be taxed as a sole proprietorship, the LLC cannot pay wages to the member and the member cannot have income tax, social security tax, or Medicare tax withheld, and cannot receive a Form W-2 from the LLC.

If your LLC has elected to be taxed as a partnership, the LLC cannot pay wages to the members and the members cannot have income tax, social security tax, or Medicare tax withheld, and cannot receive a Form W-2 from the LLC.

If your LLC has elected to be taxed as a corporation, the LLC can pay wages to the members and the members can have income tax, social security tax, and Medicare tax withheld, and can receive a Form W-2 from the LLC. This is true even if there is only a single member in the LLC.

As for LLCs that have elected to be taxed as a sole proprietorship or a partnership, members may receive a draw from the LLC and must pay quarterly federal estimated tax payments to cover the amount of federal income tax and self-employment tax liability they will have, unless covered by withholding on other income. Vision Payroll can work with you and your CPA to determine an appropriate draw and estimated tax payment schedule. You can then receive the draw as a check or direct deposit with each payroll and schedule appropriate deductions such as retirement plan contributions. Contact Vision Payroll today to get started.